2.2 Michigan Annuity Regulations

Free Look on Annuity Contracts

Michigan requires a 10-day free look on annuity contracts. After delivery, the owner has 10 days to examine the contract and cancel for a full refund of premium. For variable annuities the refund may be the account value (which can be more or less than premium) plus a return of any fees, because the funds were at market risk; for fixed and indexed annuities the buyer receives the full premium back. The period begins on delivery of the contract, not the application date.

Exam Tip: Do not assume a "30-day senior" free look in Michigan -- the standard statutory annuity right-to-examine is 10 days. The senior-protection emphasis in Michigan comes through the best interest sales rules and training, not an extended free look.

The Best Interest Standard (Public Act 266 of 2020)

Michigan amended its Insurance Code through Public Act 266 of 2020, effective December 30, 2020, to adopt the NAIC Suitability in Annuity Transactions Model Regulation (2020 revision) -- the modern best interest standard. This replaced the older suitability-only rule. A producer satisfies the best interest obligation by meeting four cumulative duties:

1. Care obligation -- exercise reasonable diligence, care, and skill; have a reasonable basis that the annuity effectively addresses the consumer's financial situation, insurance needs, and objectives.
2. Disclosure obligation -- before the recommendation, provide a written disclosure describing the producer's role, the types of products offered, and how the producer is compensated (commission, fees, etc.).
3. Conflict-of-interest obligation -- identify and avoid or reasonably manage material conflicts; cash and non-cash compensation may not improperly influence the recommendation.
4. Documentation obligation -- create and keep a written record of any recommendation and the basis for it.

Crucially, acting in the consumer's best interest means the producer may not place its own or the insurer's financial interest ahead of the consumer's. Receiving commission alone does not violate the rule, but commission may not be the driving reason for the recommendation.

Consumer Profile Information & Training

Before recommending an annuity the producer must make reasonable efforts to obtain the consumer profile information -- the facts that make a recommendation defensible.

Producer Training Requirement

DIFS requires every producer who sells annuities to complete a one-time, 4-credit annuity training course approved by the Director that covers the types of annuities, how they work, suitability/best-interest standards, and the income-tax treatment of annuities. Producers newly licensed on or after June 29, 2021 must finish this training before soliciting any annuity. Producers already selling annuities were required to complete the updated best-interest training within the transition window set by PA 266. Carriers must verify training completion before allowing a producer to sell their products.

Surrender Charges and Disclosure

Fixed and indexed annuities carry surrender charges during a surrender period (often 5-10 years on a declining scale, e.g., 7% in year 1 falling roughly one point per year). Michigan's disclosure rules require the producer to deliver and explain:

• A complete surrender-charge schedule and how many years it runs.
• Any free-withdrawal corridor (commonly 10% of account value per year penalty-free).
• Whether a market value adjustment (MVA) applies, which can raise or lower the surrender value based on interest-rate movement.
• Any bonus recapture provisions and the impact of early withdrawal on guarantees.

Worked example: A 68-year-old places $100,000 into a fixed annuity with a 7-year surrender schedule and a 10% annual free withdrawal. In year 2 (6% surrender charge) she withdraws $25,000. The first $10,000 is penalty-free; the remaining $15,000 incurs a 6% charge ($900). The producer must have disclosed this in writing and documented why a 7-year product fit a consumer who may need liquidity.

Common Trap: A recommendation is not automatically "best interest" just because the consumer signs the disclosure. The producer still must have a reasonable basis that the product fits the documented profile.

Annuity Replacement and Exchange Considerations

When a recommendation involves replacing or exchanging an existing annuity, Michigan layers an extra analysis onto the best interest duties. The producer must consider, and document, whether the consumer:

• will incur a surrender charge or lose an existing bonus, rider, or guaranteed rate;
• will be subject to a new surrender-charge period that reduces liquidity again;
• has had another exchange within the preceding 60 months (a churning red flag DIFS watches closely); and
• gains a tangible benefit -- a meaningfully better rate, feature, or income guarantee -- that justifies the costs.

A 1035 exchange lets the consumer move funds from one annuity (or life policy) to a new annuity without current income tax, but a tax-free exchange is not automatically suitable: the surrender charges and restarted lock-up can still make it the wrong move. The producer must show the exchange clears the best interest bar, not merely that it avoids tax.

Taxation Facts Producers Must Disclose

Worked example: A 58-year-old wants to surrender a fixed annuity for cash. The producer must disclose that, because she is under 59 1/2, the gain is hit with a 10% federal penalty on top of ordinary income tax, and on a non-qualified contract the gain comes out first (LIFO). Failing to explain these tax consequences before the recommendation breaches the disclosure and care duties.

Senior Protection Emphasis: Michigan directs producers to take special care with older consumers, scrutinizing liquidity needs, undue influence, and whether a long surrender period outlives the buyer's likely access horizon. DIFS treats high-pressure annuity sales to seniors as a priority enforcement area even though the free look itself stays at 10 days.